How to verify a startup founder's background before you invest

How to verify a founder's background

Check every claim in the founder's bio against a source the founder didn't write: company registries for prior companies, court and regulatory records, sanctions lists, securities filings, and people who worked with the founder, especially ones the founder didn't put forward as references. Most of it is public and cheap, and it takes a few hours per founder.

You're mostly not hunting for fraud, which is rare. You're confirming that the story in the deck matches the record. A founder who rounds up a title or an exit in a pitch is showing you how they'll report to you later.

Public records a US investor can search

The main US sources cost little or nothing: federal court records on PACER, securities filings on EDGAR, state company registries, OFAC's sanctions search and FINRA BrokerCheck. Between them they cover litigation, private raises, prior companies, sanctions and past registration as a broker or adviser. Here's what each one gives you:

• Federal court records on PACER, at $0.10 per page capped at $3 per document. Fees are waived for anyone who spends $30 or less in a quarter. State court records get searched state by state.
• Securities filings on SEC EDGAR, which has full-text search going back to 2001. A Form D names each executive officer, director and promoter of the issuer, so it shows which private raises a founder took part in.
• Company registries for each state, linked from the National Association of Secretaries of State. Use them to confirm prior companies existed, when they were formed and whether they were dissolved.
• Sanctions through OFAC's Sanctions List Search, which covers the SDN list and OFAC's other lists.
• FINRA BrokerCheck, for founders who were registered brokers or investment advisers.

Consumer reports and consent

Be careful with background-check vendors. Under the Fair Credit Reporting Act, you can only get a consumer report for a permissible purpose, and FTC staff have said a business transaction initiated by a company, as opposed to the individual, doesn't create one for its principals. In practice, get the founder's written consent before you order a credit or background report.

Searching public records yourself isn't a consumer report and doesn't need consent. This is general information and not legal advice. If you're setting up a formal screening program, ask counsel.

Prior companies and how they ended

Spend the most time on prior companies. Confirm each one existed, what the founder's role was, how much it raised and how it ended. "Acquired" can mean a sale for less than the money raised. "Stepped back" can mean the board removed them. Neither rules a founder out, but the pitch should say what the record says.

Good sources: the registries above, press coverage from the time, Form D filings for the prior company, and that company's investors, who'll usually tell you how it ended if you ask them directly.

References that matter

Reference calls turn up most of the real findings, and the valuable ones are back-channel: a former co-founder, an early employee, an investor in the last company, a customer. Ask what the founder is like under pressure, how they handled bad news, and whether the person would work with them again. Hesitation is data.

Institutional investors do this at scale. In a survey of 885 venture capitalists, Gompers and co-authors found the average firm calls 10 references per deal.

Israeli founders

For Israeli companies, the Israeli Corporations Authority gives anyone basic company information for free and sells full extracts listing shareholders and directors. Court records are harder. The courts' Net HaMishpat system is built for parties and lawyers and needs a national-ID login, so a litigation search usually means an Israeli lawyer or a subscription database.

Military unit claims (8200, Talpiot and so on) are checked through references, not records; see IDF technology units explained.

When to bring in an outside read

When the founders' histories span several countries, companies or courts, a team and integrity investigation goes faster in the hands of someone who does it every week. Olivent Diligence offers it as a $3,500 add-on to a Full Diligence, including reference design and back-channel calls. The investor pays for it, never the company.